Financial Transparency Coalition

A few days ago we blogged on an article in Singapore’s Straits Times which crowed about how the island-state is benefiting from the crackdown on tax evasion by governments in North America and Europe.

Our blog triggered an exchange with a practitioner who disputes our assessment that Singapore provides:

“strict banking secrecy laws, no register of trusts and foundations, neither company accounts nor company ownership details are placed on public record. On the regulatory side, the island-state is not rated by the Financial Action Task Force as meeting its compliance requirements, and on international cooperation Singapore has virtually no tax information exchange agreements (and even if it did have such agreements would not be able to honour them since little of the information required for effective information exchange is obtained in the first place).”

We pressed the practitioner, Michael Velten, for more detail about where he disagrees with our facts and analysis, and he has replied with fuller detail. Space constraints prevent us from making a full reply under the original blog, so here is our reply to Mr Velten’s points:

We noted that company accounts and company beneficial ownership detailes are not required to be placed on record.

Velten replied:
1. Company accounts are placed on the public record. Company ownership details are placed on the public record:
a. Audited accounts for most Singapore companies are required to be filed with the Accounting and Corporate Regulatory Authority – “ACRA”. The accounts are placed on the public record. These may be accessed.
b. Company ownership details (amongst many other details) are required to be filed on an annual return that is submitted to ACRA. This is a matter of public record. This detail may be accessed.
Please look at the ACRA website at http://www.acra.gov.sg/.

TJN
1.a We do not work on the basis of what is required of “most” Singapore companies. Instead we look at what might be called the lowest denominator requirement.

The OECD notes that:

“Requirement to file financial statements with a Governmental Authority and/or file a requisite tax return: Yes, where carrying on business in Singapore or subject to Singapore income tax.” (OECD 2008: 176).

This omits companies not subject to Singapore income tax and which do not carry on business in Singapore (see comment below on why this does not apply to most Singapore companies).

On the same page the OECD reports:

“Requirement to have financial statements audited: Yes, with an exception for dormant companies and exempt private companies whose annual revenue does not exceed $5 million.” (ibid.).

In a nutshell: the typical secrecy client with a shell (holding) company in Singapore doing business elsewhere will not need to submit financial statements, the number of companies with audited accounts will even be smaller because they can choose exempt private company status and declare profits of less than 5 million – having a couple of these companies in Singapore will eliminate any problem above the 5 million threshold.

As regards Singapore corporate taxation: we have already noted that companies not trading in Singapore or having no domestic tax liability (i.e. tax exempt companies), are not required to file accounts. On the tax side, Singapore’s selling point as a centre for holding companies is best described in the following quotation referring to the Singapore company tax code:

“18% on income sourced in Singapore for Year Assessment 2008. However, the effective tax rate can be reduced significantly (to 15%/10% or even 0%) for businesses that qualify for tax incentives. Foreign sourced dividends, foreign branch profits and foreign sourced service income are exempt from tax and with its extensive tax treaties and unilateral tax reliefs, foreign dividends received in Singapore may generally be redistributed out of Singapore tax-free to the foreign investors.” (OCRA).
http://www.ocra.com/jurisdictions/singapore.asp?LeftFrameName=18&UseReferer=1&referer=juris

Re 1b): We are talking here only about (ultimate) beneficial ownership information. The OECD reports that upon incorporation, only legal ownership needs be reported (OECD 2008: 122). Alternately, take a look at : http://www.ocra.com/jurisdictions/singapore.asp?LeftFrameName=18&UseReferer=1&referer=juris

We noted that Singapore does not meet the low threshold of 12 tax information exchange agreements set by the OECD

Velten
2. If the fact in support of the broader proposition in the posting was that “Singapore does not meet the low threshold of 12 tax information exchange agreements set by the OECD – and that threshold should be increased by a multiple of at least 5 to become meaningful” why was that not stated in the posting as opposed to “Singapore has virtually no tax information exchange agreements”.

TJN
To spell our position out as clearly as possible:

1) Singapore does not meet the lower threshold target for TIEAs set by the OECD;

2) TJN regards that threshold as far, far too low;

and

3) our concerns about the low target set by the OECD are compounded by our belief that the OECD is promoting a standard for information exchange that is weak and ineffective.

Velten
3. Singapore has signaled its commitment to exchange of information.

TJN
The litmus test for this commitment will be Singapore’s willingness to cooperate fully with the multilateral automatic information exchange programme of the European Union. No halfway houses please.

We noted that Singapore (like other secrecy jurisdictions) does not have a registry of trusts and foundations

Velten
4. Please consider MAS Notice to Trust Companies on Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice TCA-N03].

The document you reference relates to implementation of AML-Safeguards by trust service providers. Since our original point related to the registration of trusts and foundations, this seems to be a red herring. This is confirmed here:
http://www.mas.gov.sg/resource/legislation_guidelines/trust_companies/notices/AML%20Notice%20TCA%20261206.pdf

Guidelines to this regulation can be downloaded here: http://www.mas.gov.sg/resource/legislation_guidelines/aml/AML%20guidelines%20-%20TCA-N03%20261206.pdf

The guidelines note: “Trust companies are reminded that the ultimate responsibility and accountability for ensuring the trust company’s compliance with anti-money laundering and countering the financing of terrorism (“AML/CFT”)” (MAS Notice TCA-N03: Page 1, point 2). But there is nothing in the guidelines that refers to a public registry of trusts.

Furthermore, MAS appears not to require the trust service companies to systematically identify settlors and beneficiaries (as is widespread practice). Instead, MAS deems it acceptable for trust service companies to merely identify a “trust relevant party”: “A trust company shall verify the identity of the trust relevant party,” (MAS TCA-NO3, page 4, Art. 4.8). In this context, a “trust relevant party” is little more than a nominee arrangement.

And now it becomes very interesting:
“Where the trust relevant party is a company, the trust company shall, apart from identifying the trust relevant party, also identify the directors of the company.” (TCA-NO3, Art. 4.5).

The same applies to partnerships:

“Where the trust relevant party is a partnership or a limited liability partnership, the trust company shall, apart from identifying the trust relevant party, also identify the partners.” (TCA-NO3, Art. 4.6).

Put the whole package together and you have a situation in which you can create an offshore company in a secrecy jurisdiction which allows companies to be registered with corporate or nominee directors and that company becomes the ‘trust relevant party.’ Which in simple terms means that Singapore allows trust service companies to proceed with forming trusts without any disclosure of the warm blooded people who are either settlors or beneficiaries. QED

Our opinion is confirmed by the OECD (2008: 143).

TJN noted that Singapore did not achieve the FATF ‘largely compliant’ rating and that banking secrecy is protected by law

Velten says
5. Singapore has achieved 43 compliant/largely compliant FATF ratings. This puts it on par with the United States at or near the top of countries surveyed, which to my mind constitutes an excellent rating. On banking secrecy (recommendation 4), Singapore’s laws are regarded as “compliant” and the FATF observes that “This Recommendation is fully observed”.

TJN replies:
The US ranks relatively high alongside other secrecy jurisdictions, but nonetheless scores an outright non-compliance on three recommendations. And Singapore scores a non-compliance rating on two.

Both of Singapore’s non-compliance scores relate to trust service providers (see above; or rather as FATF calls them “Designated Non-Financial Businesses and Professions” DNFBP), Rec 12 and 24.

The FATF notes particularly:

“[…] there are remaining concerns about the effectiveness of the money laundering offence and the new cross-border declaration system, the requirements applicable to designated non-financial businesses and professions (DNFBPs), and the availability of beneficial ownership information in relation to legal persons and arrangements. […] Overall, the money laundering offence is not effectively implemented, given the overall low number of prosecutions and convictions and the size of Singapore’s financial sector. The statistics suggest that Singapore is more focused on prosecuting predicate offences (primarily based on domestic crime). Singapore has, generally, been less aggressive in pursuing money laundering as a separate crime in the past, particularly in relation to third-party laundering, through Singapore’s financial system, of proceeds generated by foreign predicate offences.”
(FATF 2008, V1: 3, 4).http://www.fatf-gafi.org/dataoecd/36/42/40453164.pdf

On banking secrecy, secrecy is enshrined in statute law (OECD 2008: 51), and according to OECD (2009: 110): “Singapore is only able to access bank information for exchange purposes where it has a domestic tax interest.” This latter provision might be on the way out as Singapore is forced by international pressure to concede on cross-border information exchange.